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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Thursday, June 20, 2013

IU Kelley School's Leading Index for Indiana levels out after two-month decline

June 20, 2013

BLOOMINGTON, Ind. -- The Leading Index for Indiana stopped its descent in June but didn't reclaim the ground it lost in the previous two months, leveling out at 100.7.

"The good news is that the Housing Market Index soared to levels not witnessed in seven years. The bad news is that the Purchasing Manager's Index fell into negative territory, only the second time since July 2009. As has often been the case lately, good economic data has been tempered by poor economic data," said Timothy Slaper, director of economic analysis at the Indiana Business Research Center in Indiana University's Kelley School of Business. The IBRC produces the monthly index.

The National Federation of Independent Business' Index of Small Business Optimism rose 2.3 points to 94.4. This is the second-highest reading since the recession started, but not one signaling strong economic growth. Pessimism about the economy and future sales did moderate, but planned small business job creation fell a point while the actual job creation stalled after five "up" months.

Consumer sentiment retreated this month after reaching its highest point in nearly six years in May, as household optimism about employment and housing faded slightly. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment fell to 82.7 in mid-June, below a nearly six-year high of 84.5 in May. The reading in June was the second highest in the past eight months, however, suggesting Americans were far from gloomy.

"So, nothing too bad or too good," Slaper said. "This quarter's economic growth has probably slowed to 1.5 percent, but after the effects of the hike in tax rates taper off, the economy will resume its pace of 2 percent plus growth, as has been its fashion for the last three years. Inflation remains low and going forward will remain below the Federal Reserve flash point. The housing market and rising equity prices have helped to boost consumer confidence, but only for those who have a stake in those markets."

Drivers of change

The direction and size of the jump in the National Association of Home Builders/Wells Fargo Housing Market Index was something to celebrate. For the first time since April 2006, the HMI topped 50, surging 8 points to 52. Any reading over 50 indicates that more builders view sales conditions as good rather than poor.

Tim Slaper

Timothy Slaper

Print-Quality Photo

"Surpassing this benchmark reflects the fact that builders are seeing better market conditions," Slaper said. "There is a low inventory of existing homes, and as a result, an increasing number of buyers are gravitating toward new homes."

The Institute for Supply Management's Purchasing Managers Index swung into negative territory, dipping 1.7 points to 49.0.

"The swoon indicates that the manufacturing sector moved from slightly expanding to mildly contracting," Slaper said, adding that the PMI has registered contraction only twice since July 2009. Also of concern is that the New Orders Index decreased in May by 3.5 percentage points to 48.8 percent, and the Production Index decreased by 4.9 percentage points to 48.6 percent. The Employment Index decreased slightly, too, by 0.1 percentage point.

The U.S. automobile industry sold 1.4 million light vehicles in May 2013, marking an increase of 12.3 percent from April 2013 and an increase of 8.0 percent over May 2012. The May 2013 seasonally adjusted annual rate for light vehicle sales is 15.2 million units, up from the 14.9 million units in May 2012.

Unfilled orders for auto bodies and parts -- how the auto sector is represented in the LII -- increased indiscernibly. The transportation and logistics component of the LII -- the Dow Jones Transportation Average -- moved up 1.8 percent, reclaiming the ground it lost last month.

"There appears to be increasing interest in what interest rates are doing," Slaper said. "The 10-year yield on U.S. Treasurys hit a 14-month high recently. While still low historically, it is higher than at the beginning of May. Is this a sign that we are in for more volatility in financial markets as participants try to get a read on Fed policy intentions? Or is it a rough start to a better normal in which the global economy is not partially reliant upon U.S. monetary stimulus? Good luck figuring that out.

"But until we return to a world in which the quantitative easing genie has been put back in the bottle, the interest rate spread won't serve as a good indicator of the future direction of the national or state economy. As a result, the strength of the change in the measure does not provide a signal of the direction or strength of future economic activity in the state."

About the Leading Index for Indiana

The LII, developed by the Indiana Business Research Center, is designed to reflect the unique structure of the Indiana economy. It is a predictive tool that signals changes in the direction of the economy several months before the economy has changed. In contrast to economic forecasts, which use sophisticated statistical models to foretell particular levels for a wide variety of economic activities and outcomes in the future, a leading index is a simple construct that indicates a general direction of future economic activity expected in the next five to six months.